Determining Capital or Revenue Nature

Determining capital or revenue nature is undoubtedly very important in the field of accounting. Before excavating any deeper first and the most important thing is to know the basic meaning of revenue nature and capital. Let us take a brief look.

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• Capital Expenditures and Revenue Expenditures
• Capital Receipt and Revenue Receipt

Capital Nature and Revenue Nature

The capital nature and the revenue nature differ from each other on the basis of the time for which the purchases will be used. Let’s now understand both of them in detail.

Capital Nature

Capital expenditures include large purchases of fixed assets that can be used for a longer duration. In other words,  the acquisition of fixed assets for certainly longer durations represents the capital nature of expenditure. For example, the expenditures that are made for buying manufacturing equipment and as a result, the equipment can be used for longer durations.

Also, the company providing the equipment cannot deduct the full cost and the cost is required to be updated according to the year-by-year devaluation of the product. These are basically non- recurring in nature.

Capital expenditures are classified into three main sections:

1. Expenditures made to reduce the costs
2. Expenditures made to increase the revenue
3. Expenditure which is explainable on the non- economic grounds, that is, the expenses made without any relation to the money related profits.

Some examples of Capital Expenditures are

• The expenditures related to social activities.
• The expenses made for buying machinery.
• The investments made for doing research work and innovations.

Revenue Nature

In contrast to capital nature, short-term expenses represent the revenue nature. Unlike capital nature, this one is related to the expenditures that are made for specific operating periods. Furthermore, such expenses neither generate assets nor the liabilities. For example, the expenditures made to facilitate the current operation that is, repair costs and maintenance expenses.

Revenue nature Expenditure is of two types

• Expenditure for generating revenue: This type of expenditure is for the ongoing operational processes. Likewise, the operating expenses meet the running business or factory cost requirements. In the same year in which the expenses are occurring,  in the revenue expenses, the tax liabilities also lowers.
• Expenditure for maintaining the revenue-producing assets:  The expenses for the generic and ordinary repairing and preservation costs are revenue expenditure. The expectations are to keep the asset in the working condition without any involvement in increasing the life and workability of the asset.

Examples of the Revenue Expenditure are

• Paying rent for houses, shops, etc.
• Salaries for the various jobs.
• Advertising costs
• Legal expenses
• Insurance costs such as, vehicle insurance, life insurance etc.
• Water and electricity bill payments.

Unlike capital nature expenses, revenue nature expenditures are recurring in nature.

Determining Capital Nature and Revenue Nature

There are certain basic considerations when we are determining the nature of a financial transaction, i.e. capital nature or revenue nature. Some such considerations are as follows.

Nature of Business

The capital or revenue nature is dependent on the type of business a person does. It is different for different types of business. For instance, a business that provides car insurance to people comes under the revenue nature but the manufacturer buying the machinery for his factory is capital expenditure.

Recurring Nature of Expenditure

As stated earlier, revenue nature expenditures are recurring in nature and capital nature expenditures are non-recurring in nature.

Purpose of Expenditure

The manufacturing process is an illustration of capital nature while renovation and repairing processes are expenses of revenue nature.

Solved Questions for you

Q: What is the basic difference between capital nature and revenue nature of expenditure?

Ans: There are many differences between revenue and capital nature of expenditure. But the basic difference is capital expenditures are the long-term acquisition of fixed assets. While revenue expenses are short-term expenses that are for specific operating periods.

Q: Tax receipts are examples of revenue expenses or capital expense in nature?

Ans: Tax receipts are an example of revenue expenses. These are recurring expenses for an organization, hence fall under revenue expenditure.